As you know, it is a common strategy to have a group of underwriters in the syndication process. Is it always necessary to have a group of them on board? Well, it is not necessary to have them on board. You are right when you say that one of the most used strategies in the syndication market is having underwriters on board. However, it is not necessarily the case. Let me tell you a couple of things. In reality what makes the difference between the different strategies in a syndication process is how you, mandated lead arranger, are confident about your ability to place big portions of the loan in the market. There are periods in financial markets where liquidity is particularly abundant. Level of interest rate is not particularly high. Volatility is not a concern. And so, in this case, you can work in a very confident way, as a mandated lead arranger, taking the mandate for the whole amount of funds, and then go straight in the market, trying to sell portions of the loan to other banks that can be interested in participating in a syndication process. So, the stage is just one. You have a mandate, and then you try to sell down portions of the loan in the so-called general syndication phase. This is a strategy that doesn't involve the creation of a group of underwriters. And it is called single stage syndication. You can use single stage syndication when the market is really very easy to be foreseen. So, you can go straight to the general syndication phase because you are almost 100% sure that you will be able to find other banks that jump on board with you. This has a great advantage for the MLA because you don't have to invite underwriters that will require from you, a big amount of fees that you as a MLA receive to organize the syndicate. And so you can take, you can retain a big portion of fees exactly for you. So, the typical single state syndication process is a typical high risk, high return kind of strategy. High return because most of the fees will be retained by you. And high risk because the risk for you is that if you don't exactly understand how the market is behaving you could find a bad situation where you have the commitment and you don't have banks that can jump on board with you in the syndicate itself. On the other hand, you were right in saying that typically the group of underwriters is always created, or in most cases is created in a typical syndication structure. In this case, you can understand that the process of syndication is split into sections. The first one is when you start sharing the commitment to lend with the restricted group, typically represented by large banks, the most active banks in the syndication market. So, the mandated lead arranger on one side, together with this group of underwriters, share the commitment to lend to the borrower itself. Let's do it with numbers. Suppose that you have committed to lend money for an amount of $1 billion. If you don't find any other banks that jump on board, in the syndicate, you have 1 billion to be lent to the borrower. In order to share immediately the risk, you call, let's say, three other banks, asking them to commit, together with you, 1/4 of the loan. So you are one bank. And you ask three other banks to join in the syndicate in the role of underwriters. At the end of the day, even if you don't find the other banks, your final commitment will be no longer $1 billion US, but $250 million. Being the remaining 750 million underwritten by the other group of underwriters. After the group has been organized, and that this ends the first stage of syndication, you start the second stage when you, mandated lead arranger, and the other underwriters, try to sell portions of the loan in the market. This is the second stage. When you reach the general syndication market. This is why the second strategy is typically named as a dual stage syndication. I think I understand the differences between the two strategies. What are the advantages and disadvantages of having a group of underwriters then? Well, just to recap on what you are asking me, I would say there are advantages and disadvantages for sure in going through a dual stage syndication. Let me say, the main advantage is really risk sharing. At the end of the day you have a commitment for the total amount. And using a group of sub-underwriters you can really share the risk at the very beginning of the syndication process. And you can understand that this is particularly critical when market conditions are particularly tough. Volatility is high, you are not 100% sure to go straight to the general syndication phase. So, from this point of view, having a small group of big banks on board gives you comfort in having the possibility to share the risk. This is probably the most important advantage. On the other side there you have, you have cons. Of course, because nothing comes for free in finance. And so, you have reduced the risk because the dual stage syndication, compared with the single stage syndication, is typically a low risk, low return strategy. It is low risk because you have shared the risk with the other underwriters but you have also lower returns because at the end of the day, these guys will ask a big portion of fees to take the commitment to lend. And so, from this point of view, the big disadvantage is exactly the opposite side. You have shared the risk but on the other side, you have to sacrifice sometimes a big portion of this kind of fees. So, lower return for you. Is there any trend in the market for syndication? Yes, there is. I would say, there is a clear trend toward a simplification of the syndication process. And the simplification of the syndication process is mainly being driven by the recent financial crisis and the turmoil. If you understand, turmoil has generated a lot of volatility in the market. And also today, volatility has not been completely reabsorbed. The inter-bank market is sometimes paralyzed, particularly in some areas of the world. And so, it is not possible to take a lot of time in organizing the group of banks that will belong to the syndicate. Take the case of big syndicates for very large infrastructure projects. If you think that big syndicates can count up to 30, 40, 50 banks, it takes some months to organize a syndicate. And this is not compatible with the degree of volatility that the market is boasting right now. You must speed up the process. Because the risk, otherwise, is that you get a mandate now when the market is favorable for the syndication process and you end the syndication process exactly when the market has turned from positive to negative. And this creates some risk for you because you don't know ex-ante if the market conditions will be favorable or not. The bottom line is that the market for syndication has simplified a lot. And typically, what is happening, in recent days, is that the club deal strategy has emerged as one of the most used. The club deal strategy is simply a strategy whereby when a borrower is requiring money, rather than bidding for getting a mandate as a single bank, so a single mandated lead arranger, typically, I join immediately my forces with a restricted group of co-arrangers that together with me bid jointly to get the mandate. If you want, in a nutshell, it's like to have a very restricted syndicate which is composed only by joint mandated lead arrangers. There are advantages and disadvantages also in this case. The main advantage is that you speed up the process because organizing this club deal is much quicker. The dark side, the negative side if you want, is that at the end of the day these guys participate in the transaction only if they will have the same amount of fee a you. And so, at the end of the day, again, something that goes toward lower risk, lower return kind of strategy, probably even lower risk and probably even lower return that a typical single state strategies in the old days.
